Blog / Time-Frame And other aspects of trading

Time-Frame And other aspects of trading

Tradersconstantly try to improve their market participationoccasionally ask the question:

What is the appropriate time-frame for meafter taking into accountthe present situation?

Of course this dependson a lot of things like the following:

-What is my objectivewith my market participation?

-How much time am I willing to allocate toreach my objective?

-How much capital do I have?

-What kind of market experience do I have?

-What kind of edge do I have on the market?

-How much stress level am I willing to endure during market participation?

Even after answering many questions some traders might conclude and select the wrong direction,due to many seemingly unimportantdetails.

One of that is thebrokerage commission, and the slippage, that is associated withtrades, executing market orders.

The more trades youdo on a yearly basis, the more stress you need to endure.

The following table shows a hypothetical examplefor the brokeragecosts for a trader on different time-frame.

Assumption was in the calculation, that the trader pay 16 $ for a round trade.

The brokerage fee could accumulate to a horrendous level for a scalper or Day – trader.

The most important is not actually the brokerage fee, but theRatio ofthe Yearly brokerage fee to yourtrading Capital.

If you pay 50 000 $ a year for brokerage fee, and you areplaying the market on a 1 Min time – frame, having a 50 K account and playing all trades with a 100% allocation, thanbasicallythe yearly brokerage commission is equal to 100% of your Capital, andthe probability to stay consistentlyon the winning campis very close tozero.

A rule of thumb might be that yearlybrokerage fee should be less than 10 - 15 % of thetrading account, to have a fair chance to stay consistentlyin the winning camp.

Depending on the trading style, trade execution, the total Yearly slippage can be as big or even bigger than the total yearly brokerage fee. For this reason try tominimize the market ordersby putting in limit orders ifreasonable, exercising more control over the trade.

Time-frameis only a construction, abstraction level, that helps tovisualizethe marketaction through chart creation.

The actualmarket behavior is a constant flow oftrades regardless of one specified time-frame, asa construction of endless time-frames put together.

Opportunitiesshow up on different time-frames.Some of the most successful tradersparticipate in the marketby taking the opportunities on different time-frames, even if they might have one selected time-frame which bring inthebulk of the yearly profit, other time-frameplays mightadd to the bottom line.

Predictionwizard supportplaying the market on multiple time-frames.

One example isif the market trading in a tight range for a prolonged period of time, say many weeks or months, andsuddenly breaks outand move decisivelyon very high volume, compared to the average volume within the range.In thissituation playing the 1,2,3,5 minute time-frames could be successful, but we probably willlimit the potentialof the total yearly profit by restricting ourselves to trade only this very short-time-frame.

Buttradingopportunities on multiple time-frames usually not the way, newbie, novice traders cansuccessfully participate, as it requires much more tradingexperience.

Few traders consider the energy level ormental strength asanother extremely important component, in addition to our trading capital.But that also should be in the picture, when we constantly evaluate our market participation.

One example:

ADay-Traderworking 9 hours a day,starting 1.5 hours before the market open,trading during the daily market period (6.5 hours) andstill working 1 hour after the market closed.)

This intensivemarket participation could be continued fora weeks, months, or even for a few years but probably not formany years without long interruptions.

By analyzing thetrading resultswe see, that 90% of the yearly profit camein during the first 60 minutes of the regular market session and the last 90 minutes of the regular market session.

Sothis tradergets 90% of the yearly profitby watching the monitor(s)150 minutes, andget the remaining 10%by sittingand watching the market for another (240 – 360 minutes, depending on how muchwe consider in the pre-market / after-market period)

Does it worth todeplete / kill our mental energy level byfollowing the market all day, when we do not have the added benefit?Probably not. In this case spending 60 % of the time in front of the monitors for the 10%added profit level.Some of the biggest market players know this, and stay away fromthe market when it is slow or does not show good potential reward.

We can even definemarket status, what we would consider low potential periods, when wetake a rest andnot following the markets.

After this introductionwe would like to highlighttwo very important aspects of our market participation, that every trader try to constantly improve, with moreor less success.

These are:

1.WIN PROBABILITY

2.RISK / REWARD RATIO

These two are measures and considered the crucially important aspects of our market participation.

We can’t improve win Pct directly, but we can improve our market participation strategy, or mental fitness, our trade execution… to ultimately improve these two measures.

To demonstrate theimpact of these measures we created thefollowing table with 20 different strategies.

In the table presented belowwe would like to see the impact of the win probability at 50%, 60%, 70% and 80%. Anything above 80% isa gratis,and mightnot be possible to maintain for very long period of time. Alsowe would like to seethe impact of the Risk / Rewardat different values, like 1/ 1.331 / 2,1 / 2.5, 1 / 3,1 / 4

Analyzing the tablethe crucial importance of these numbers will become obvious:

A trader, with 50% Win rate and 1/2 Risk / Reward is a Good trader, but gets only 50 profit units out of 100 Trades, BUT an excellent trader, who manage to get 80% Win rate and1/3 Risk / Reward, gets 220 profit units out of 100 trades -> The difference is a whopping 19.36 / 1in only two years (220/50 exp 2OR 4.4 exp 2) between these two traders. (Assuming they do 100 trades a year)

So if the first traderget 1 Million, the other trader get almost 20 million during the traded two years using the same money available! The Risk / Reward ratio and the Win Pct is thatIMPORTANT, the CRUCIAL aspects of trading!